Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

According to the mercantilists, a nation's welfare would improve if it maintained a surplus of exports over imports.

If Hong Kong and Taiwan had identical labor costs but were subject to increasing costs of production:

If Canada has a higher wage level and higher labor productivity than Mexico, Canada will necessarily produce a good at a higher labor cost than Mexico.

Adam Smith contended that gold, silver, and other precious metals constituted the wealth of a nation.

Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions.

Under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden:

Assume that the United States is more efficient than the United Kingdom in the production of all goods. Mutually beneficial trade is possible according to the principle of absolute advantage, but is impossible according to the principle of comparative advantage.

If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade tend to be shared about equally between them.

Assume 1990 to be the base year. If by the end of 2004 a country's export price index rose from 100 to 130 while its import price index rose from 100 to 115, its terms of trade would equal 113.

Mutually beneficial trade for two countries occurs if the equilibrium terms of trade lies between the two countries' domestic cost ratios.

Assume 1990 to be the base year. If by the end of 2004 a country's export price index rose from 100 to 125 while its import price index rose from 100 to 125, its terms of trade would equal 100.

The commodity terms of trade measures

For the commodity terms of trade to improve, a country's export price index must rise relative to its import price index over a given time period.

Figure 2.4 Production Possibilities Frontier -In Figure 2.4 one car can be produced at a cost of

If Canada experiences $\underline { \text { increasing } }$ opportunity costs, its supply schedule of steel will be:

There are two explanations of constant opportunity costs: (1) factors of production are imperfect substitutes for each other; (2) all units of a given factor have different qualities.

Table 2.1. Output Possibilities of the U.S. and the U.K. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Output per Worker per day }$ Caunty Tons of Steel Televisians United States 5 45 United Kingdom 5 20 -Refer to Table 2.1. If trade opens up between the United States and the United Kingdom, American firms should specialize in producing:

The terms of trade is given by:

Who gains more from trade, when nations are of unequal economic size?

Ricardo's model of comparative advantage assumed all of the following except: